Estimating the buyer's willingness to pay using Bayesian belief distribution with IFR

Xavier Brusset and Roxane Cattan-Jallet

MPRA Paper from University Library of Munich, Germany

Abstract: In supply chain management, information about the downstream party's willingness to pay (wtp) for a service or a good sold by an upstream party may not be known to the latter. The seller has to make an educated guess for the price at which to offer a good or service. If the buyer refuses to buy, the seller can still turn to a third party and sell at a lower price or hold onto the good. We show that the seller has one interior profit maximizing price if his Bayesian belief about the buyer's wtp follows a distribution which has an increasing failure rate (IFR) in the sense of \cite{bar3}. We prove that the precision of information available to the supplier influences the rent distribution and how the downstream party might opportunistically mis-inform the upstream partner. We propose another reading of the single-price newsvendor problem in Lariviere and Porteus (2001), Ziya et al. (2004a,b), Paul (2006) or Lariviere (2006). Our approach applies to all types of mechanism design problems where a profit-maximizing party has to rely on Bayesian belief to palliate information asymmetry and has alternative sources of income or cost.

Keywords: supply chain optimization; Bayesian belief; mechanism design; increasing failure rate (search for similar items in EconPapers)
JEL-codes: C44 C72 D82 D84 (search for similar items in EconPapers)
Date: 2009-10-09, Revised 2010-05-10
New Economics Papers: this item is included in nep-cta
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https://mpra.ub.uni-muenchen.de/32238/2/MPRA_paper_32238.pdf revised version (application/pdf)

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